January 18, 2012

"Beggar-thy-neighbor" versus "beggar-thyself" policies

There is an important difference between domestic economic policies that create benefits by imposing costs on other nations ("beggar-thy-neighbor policies") and those whose economic costs are borne primarily at home though they might affect others as well ("beggar-thyself policies").

Beggar-thy-neighbor policies need to be regulated at the international level because a nation, left to its own devices, has the incentive to pursue zero-sum policies at the expense of others. This is the strongest argument for subjecting China’s currency policies or large macroeconomic imbalances like Germany’s trade surplus to greater global discipline than currently exists.

However, “beggar thyself” policies are not the consequence of a failure of international cooperation. They reflect either a deliberate domestic decision to sacrifice economic efficiency to a competing social value, or, in the worst case, a failure of domestic politics.

Consider, for example, agricultural subsidies, bans on genetically modified organisms, or lax financial regulation. While these policies might impose costs on other countries, they are deployed not to extract advantages from them, but because other domestic-policy motives – such as distributional, administrative, or public-health concerns – prevail over the objective of economic efficiency.

The case for global discipline is in fact quite weak with beggar-thyself policies. After all, it should not be up to the “global community” to tell individual countries how they ought to weight competing goals. Imposing costs on other countries is not, by itself, a cause for global regulation. (Indeed, economists hardly complain when a country’s trade liberalization harms competitors.) Democracies, in particular, ought to be allowed to make their own “mistakes.”

Comments

While I agree with the general point, it seems bizarre to include agricultural subsidies as an example of a "beggar thyself" policy. French agricultural subsidies promote the indirect export of cheap wine, for example, although it is correct to point out that wine is not differentiated by price alone. The most egregious example of a global beggar-thy-neighbor agricultural subsidy is in the United States, where massive subsidized agricultural production is funneled into cheap exports. Perhaps your article should contain the caveat that the agricultural subsidies in question are only "beggar thyself" policies if agricultural production is not significantly exported across national boundaries, i.e. it is domestically consumed, as in China.

I agree with Josh V about the importance of export promotion vs. simple domestic consumption promotion. The same could apply to tax rates. For example, it could be that the Irish truly believe in the local benefits of having low corporate tax rates. However, if many european firms start to outsource their activity to Ireland in order to profit from their fiscal regime, then it become fiscal dumping. The lign between "beggar-thy-neighbour" and "beggar-thyself" is not clear-cut, but it can be approximated.

The difference between "BTN" and "BT" policies are not so stark as they were before, say pre-WW2. With an increase in the interconnectedness of markets and direct foreign investment, what one country does domestically has a huge effect on others, even if the original intention was not to raise oneself up at the expense of others (in the zero-sum scenario you mention). The case of the financial crisis in the U.S. and Greece are clear-cut examples of this. Indeed, BT policies can turn into BTN policies quickly, especially when aided by poor regulation (in the E.U.) or weak governance (in developing countries).

If you have time, I've got a question regarding trade liberalization that I personally have not yet seen studied in the litterature. I actually first came to think about this when I read Christina D. Romers summary of existing empirical research on the effects of fiscal policy. In one of the footnotes in her paper I found the following comment:

IMF (2010) points out that there is another problem with using what actually happened to the deficit as the measure of fiscal austerity. Policymakers may tend to stop fiscal consolidations that are followed by output declines, but continue those followed by output increases. So the only consolidations that show up in the budget data are the ones followed by growth. This biases the estimates toward finding that consolidations lead to output expansions.

Could the same bias exist in the studies of trade liberalization?

If you just exchange the words ''deficit'' and ''fiscal austerity'' with ''growth'' and ''trade liberalization'' the abovementioned would turn into

Policymakers may tend to stop trade liberalizations that are followed by output declines, but continue those followed by output increases. So the only liberalizations that show up in the data are the ones followed by growth. This biases the estimates toward finding that trade liberalizations lead to output expansions.

Could this be true about trade liberalization, just as it apparently can be true of fiscal consolidation?

Hope it's ok to ask (I've also sent you an e-mail). It would be very interesting to hear some short comment from you on this.

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Policymakers may tend to stop trade liberalizations that are followed by output declines, but continue those followed by output increases. jcpenney printable coupons So the only liberalizations that show up in the data are the ones followed by growth.

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The case for global discipline is in fact quite weak with beggar-thyself policies. After all, it should not be up to the “global community” to tell individual countries how they ought to weight competing goals. Imposing costs on other countries is not, by itself, a cause for global regulation. (Indeed, economists hardly complain when a country’s trade liberalization harms competitors.) Democracies, in particular, ought to be allowed to make their own “mistakes.” buy from china

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Yes, it shouldn't be up to “global community” to tell individual countries how they ought to weight competing goals, but they still have an effect in the end. I believe they are like two peas in a pod.

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